With house price affordability at an all-time low, the old model of saving for a deposit has spiralled out of the reach of many first home buyers.
Luckily, there are other ways for first home buyers to realise their dream of home ownership before house prices really do become unattainable in the future - home loans with a family guarantee.
Family guarantee home loans
Basically, this type of mortgage helps buyers who don't use their own funds as a deposit, but instead access the equity in a parent or another close family member's house to help secure the loan.
To qualify for a family guarantee, the close family member - or 'guarantor' - must of course have sufficient equity in their home not only to make up the deposit shortfall on the new loan, but to continue to satisfy their own, existing loan arrangements.
There are plenty of benefits but also potential risks to this sort of arrangement.
First and foremost, families can help each other out in these changed modern times without actually exchanging real money. So, with house prices at all-time highs, it is a great way for younger people to buy into the property market right now rather than after several years of saving for a deposit, by which time house prices are likely to have increased even more.
Not only that, while guarantors in the past may have secured the entire loan by putting their homes on the line, family guarantees mean the exposure by the parents or family members providing the guarantee can be split or limited so that the family member is only risking a part of their asset.
For instance, some banks will allow the family guarantee to be limited to 20% of the new property value plus associated costs. This gives them the power to satisfy the bank's 80% loan to value ratio and avoid costly mortgage lender's insurance. And provide the kids with an opportunity to pay down the loan and revalue their home in 1 or 2 years with the view of reducing the ratio back down to 80% on their home and releasing the reliance on the parent’s property under the guarantee.
At the same time, children get into a tough housing market as soon as possible, potentially avoid mortgage insurance, and maximise their choices when it comes to effectively borrowing 100% of a property's purchase price.
Like anything, however, there are also potential risks. These include:
- Puts the parent’s family home at risk.
- The remaining equity in the guarantor's home may be limited.
- The new loan may be limited in terms of whether it can be refinanced or increased.
- Not all lenders offer family guarantee loans, meaning the borrowing choices for both parties are limited.
- Not getting the expert advice from a mortgage broker like Mint Equity could mean both parties fail to understand the full implications of a family guarantee loan.
Latest update to Stamp Duty
The NSW Government has announced a comprehensive package of measures to support first home buyers by providing stamp duty exemptions on existing and new homes up to $650,000 and stamp duty discounts up to $800,000. These changes, to be introduced on 1 July 2017, will provide savings of up to $24,740 for first home buyers. To learn more, read our article Stamp Duty abolished for NSW first home buyers.
What to do next?
If you are unsure if the benefits of a family guarantee home loan are worth the risks in your particular situation, only an expert mortgage broker like Mint Equity has the experience and expertise not only to help you weigh it up but also to guide you through the process.